The Monday Report – 19 June 2022

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This story features HUB24 LIMITED, and other companies.
For more info SHARE ANALYSIS: HUB
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Recession?

While the Australian economy is better placed not to fall into recession, it will not necessarily be immune if the US and therefore global economy does so. Thursday night on Wall Street wreaked of recession fear as commentators look to potentially two more consecutive 75 points hikes from the Fed.

Action on the ASX on Friday had recession written all over it from the bell, as the ASX200 plunged -180 points in the first 40 minutes. Some steady buying thereafter trimmed the losses.

Demand cooling was evident in materials (-2.8%), energy (-1.6%) and discretionary (-1.4%). The biggest hit came from the banks (-2.2%), with majors now reaching of approaching 52-week lows. Cleary the market considers higher margins from higher rates cannot offset lower loan demand and mortgage distress. The Aussie ten-year yield bounced back up 15 points to 4.14% as investors abandoned bonds as well, and economists are now crawling over each other to downgrade their house price expectations.

Technology fell -2.4% to follow the Nasdaq but thereafter sector falls were less severe among the defensives, with utilities down -0.4%, real estate -0.6% and industrials 0.8%, while supposedly recession-proof staples actually rose 0.6%. There has to be somewhere to hide.

GUD Holdings ((GUD)) was the worst individual performer after trying to sneak a weak trading update through at the death. It fell -19.6%. Wealth platform Hub24 ((HUB)) will benefit from higher cash rates, but not market withdrawals. It fell -7.5%.

Lower demand for “stuff” was reflected in Harvey Norman ((HVN)) falling -6.6%, and lower demand for coal saw Whitehaven Coal ((WHC)) down -6.2%. KFC you’d think would be a downturn go-to but rising costs (eg lettuce, but also chicken) don’t help margins. Collins Foods ((CKF)) fell -6.1%.

The day’s winners were a batch of already beaten-down stocks in the form of Zip Co ((ZIP)), up 6.9% and EML Payments ((EML)), up 9.4%, while in the old online world, Carsales ((CAR)) also found bargain-hunters, up 8.1%. Thereafter, gold miners outperformed.

Our market is very much beholden to sentiment on Wall Street at the moment, and an attempt to consolidate the week’s falls on Friday night ended with the S&P500 managing only a 0.2% gain. Not good enough for our futures, which closed down -19 points on Saturday morning.

Wall Street is closed on Monday night, which may give local traders a break to assess the situation. On Tuesday we get the minutes of the June RBA meeting, and all will be looking for clues of just how aggressive the board is planning to be.

Toss a Coin

“One need look no further for signs of recession-pricing than last night’s aforementioned plunge in US energy stocks. The WTI crude price rose 2% and the S&P energy sector fell -5.6%. Typically the two are in lockstep, but not when a slowing economy meets unaffordable prices – there follows demand destruction.”

This I noted in Friday morning’s report. On Friday the WTI prices fell -6.8% and Brent -5.0% and the S&P500 energy sector fell -5.6% to again be the standout underperformer on the day.

There are two reasons for the sharp pullback in oil prices last week, neither of which relate to new supply/demand news. Recession fears, and the anticipation of a subsequent demand drop-off, is one reason. The other is that having outperformed so significantly from the 2020 covid bounce, taking profits in energy stocks is one way to cover losses in everything else.

Energy is nevertheless only 5% of the S&P cap-weight, so it cannot alone be a saviour. And even if oil prices fall well below US$100/bbl, producers will still be raking it in.

The oil price falls nonetheless highlight the current debate, or debates, on Wall Street, and both of those have analysts and commentators split 50/50. Is the US economy going into recession, and having fallen so far on that fear, has Wall Street yet seen a bottom?

Those who argue a recession is not nigh point specifically to the ultra-low US unemployment rate, and the fact there are still around two job openings for every unemployed. Add in strong household savings, robust corporate balance sheets, and still-solid manufacturing and services PMIs, and the set-up is not typical of a recession. Certainly not a deep one.

Others argue the US is already in a recession. And historically low consumer sentiment suggests you don’t need to have a secure job or a savings buffer to prevent you from hiding under the bed.

As to a bottom, Friday night’s action was not encouraging, even though there is solid agreement that Wall Street is indeed oversold. The Dow was down -270 at its low and up over 100 at its high and closed down -38.

But the current S&P500 PE multiple is only down to an historically average level, which is not enough to suggest a recession has been priced in. The swing factor will be actual June quarter earnings results, which will flow from mid-July. There is little disagreement forecasts are currently too high. If this is the case, then a lower E will imply a higher PE, and value will not be thus at all apparent.

So on that basis the S&P500 has to go lower, and 3400-3500 is considered support (current 3674). And still the pundits argue Wall Street has not yet seen true capitulation, which would be reflected in free-falling markets and a VIX surging up through 40. To date, falls have been sharp but relatively orderly.

That doesn’t mean Wall Street can’t bounce for a while. Maybe up until those earnings reports start painting a true picture.

Commodities

No joy anywhere really.

At least Australian commodity exporters will be relieved by the US dollar resuming its rise, following Thursday night’s Swiss National Bank shock, which has the Aussie back down -1.7% at US$0.6936.

The Week Ahead

US markets are closed tonight.

Tomorrow brings the release of the RBA minutes.

It’s otherwise a quiet week all round for both economic data and scheduled corporate events.

The US will see numbers for new and existing home sale and consumer sentiment.

Global flash estimates of June PMIs are due on Thursday.

New Zealand is closed on Friday.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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